IFRS and US GAAP authorised CMUCPP maintains the constant purchasing power of constant real value non-monetary items (e.g. capital, all items in shareholders´ equity, provisions, salaries, wages, pensions, taxes, trade debtors/creditors, etc) in terms of a Daily CPI in entities that at least break even in real value during low and high inflation, hyperinflation and deflation - ceteris paribus. European Accounting Assoc: "Capital maintenance is a competing objective of financial reporting."
A Response to Steve Hanke on Iran´s Hyperinflation
A Response to Steve Hanke on Iran´s
Steve Hanke stated in his interview with Iran View that there are three ways
in which hyperinflation can be stopped:
Dollarization (as it happened in Zimbabwe).
least four countries, Turkey, Angola, Chile and Brazil, were in hyperinflation
and did not use any of the above three methods to stop hyperinflation.
was in high inflation and hyperinflation for 30 years from 1964 to 1994. See How Brazil beatHyperinflation. In principle, Brazil used capital maintenance in units
of constant purchasing power in terms of a government-supplied daily index plus
daily inflation-adjustment of monetary items to stop hyperinflation.
How Iran can immediately stop the
effects of the stable measuring unit assumption and hyperinflation
is how Iran can immediately eliminate
the stable measuring units assumption
(Historical Cost Accounting) and its destructive
effect from the country´s constant real value non-monetary item economy
(constant item economy) and
the destructive effect of hyperinflation
(not actual hyperinflation) from its monetary economy (it would be as if there
were no hyperinflation in Iran):
Iranian Accounting Standards Authority has to immediately authorize a national
accounting standard requiring (not optional) Iranian companies to implement capital
maintenance in units of constant purchasing power in terms of a daily index as
originally authorized in International Financial Reporting Standards (IFRS) in
the original Framework (1989), Par. 104 (a) [now The Conceptual Framework
(2010), Par. 4.59 (a)] which states: “Financial
capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.” This would remove the stable
measuring unit assumption (Historical Cost Accounting) and consequently its
very destructive effect from the Iranian constant item economy. The stable
measuring unit assumption is never
implemented under capital maintenance in units of constant purchasing power.
All constant items would always and everywhere be measured in units of constant
purchasing power in terms of a daily index: the US Dollar parallel rate during
Central Bank of Iran has to immediately issue a regulation requiring daily
inflation-adjustment of all monetary items in the Iranian monetary economy in
terms of a daily index (the USD daily parallel rate during hyperinflation) with
complete co-ordination (everyone doing it). This would remove the total cost of and gain from
hyperinflation from the entire Iranian monetary economy (excluding from actual
local currency bank notes and coins). It would be as if there were no
hyperinflation in Iran.
is currently inflation-indexing 25 per cent of its broad M3 money supply on a
daily basis in terms of their daily Unidad
de Fomento which is a daily monetized indexed unit of account first started
in 1967. Chile is a low inflation country. More than USD 3.5 trillion in government
capital inflation-indexed bonds are inflation-indexed daily in the world
economy in mostly low inflationary economies - as well as in Venezuela´s
hyperinflationary economy - in terms of country specific Daily CPIs.
items are local currency units held and items expressed in terms of the local
currency with an underlying monetary nature being substitutes of the former.
would have to currently use their daily US Dollar parallel rate as a substitute
for a daily index (Daily CPI) when Consumer Price Index data are not available.
The USD parallel rate is constantly available in hyperinflationary economies.
items are all items that are not monetary items
items are sub-divided in:
(a)Variable real value non-monetary items (variable items), e.g., property,
plant equipment, inventories, foreign exchange, etc. valued daily in terms of
IFRS authorized measurement bases, for example, fair value (e.g., market
value), net realisable value, recoverable value, present value, etc., excluding measurement in terms
of the stable measuring unit assumption, e.g., excluding nominal Historical Cost (daily updated HC would be used
under capital maintenance in units of constant purchasing power).
I believe Ben Bernanke, the head of
the US Federal Reserve Bank, stated in a book of which he is a co-author that
in hyperinflation there are generally no price increases. I agee with him. That
is what I told Zimbabweans on a daily basis on the New Zimbabwe internet forum
during the last two years of their hyperinflation. All items´ prices generally
stay the same in US Dollars during hyperinflation within the hyperinflationary
economy. Nominal prices are simply updated in terms of the rapidly depreciating
local currency. That´s all that is happening. Update everything (all prices) in
an inflationary and hyperinflationary economy and the total cost of and gain
from inflation and hyperinflation are completely eliminated in the economy. This requires
complete co-ordination (everyone doing it).
(b)Constant real value non-monetary items (constant items), e.g., capital
(all items in shareholders´ equity), trade debtors, trade creditors, all
non-monetary payables and receivables (e.g., taxes payable and receivable),
salaries, wages, rents, all items in the income statement, etc., always and everywhere measured in units of constant
purchasing power in terms of a daily index, e.g. a Daily Consumer Price Index
(the daily US Dollar parallel rate during hyperinflation). This automatically
maintains their constant purchasing power constant under capital maintenance in
units of constant purchasing power in terms of a daily index or rate (the daily
US Dollar parallel rate during hyperinflation).
Iranian company can immediately start implementing capital maintenance in units
of constant purchasing power even without a specific requirement from the
Iranian National Accounting Stanards Authority because it was authorized as an
option in IFRS in 1989, i.e., 23 years ago.
specific Iranian national accounting standard requiring capital maintenance in unit of constant purchasing
power in terms of a daily index (US Dollar parallel rate) would put the entire
Iranian constant item economy operating on a constant item basis: in units of
constant purchasing power.
Then it would be necessary for the
Iranian Central Bank to require
daily inflation-adjustment of the entire money supply under complete
co-ordination to completely eliminate the
effect of hyperinflation from the complete Iranian monetary economy.
This would not affect hyperinflation
in actual local currency bank notes and coins created via an excessive creation
of money in the monetary economy – only the
effect of hyperinflation in the rest of the monetary economy. However,
once the entire constant item and
monetary economies operate in terms of constant real values (as if there were
no hyperinflation in the case of the monetary economy - although the rial would
be in hyperinflation), the comprehenisive advantages of stability in the constant
item and monetary economies (excluding
actual bank notes and coins) would quickly outweigh the very transitory
advantages of creating hyperinflation via the excessive creation of money in
the monetary economy. The full understanding of the effects of the stable
measuring unit assumption by Iranians may even remove all advantages of hyperinflation for whoever is creating the
hyperinflation in Iran via excessive money creation.
Iranian companies may also choose to
do their accounting in terms of the daily US Dollar parallel rate, i.e.,
accounting dollarization: the US Dollar being used as the reporting currency
for daily internal management control and normal external financial reporting.
This is the same as capital maintenance in units of constant purchasing power
in terms of the daily US Dollar parallel rate, but with the reporting currency
being the US Dollar instead of the Iranian rial. The great advantage of
accounting dollarization is that it is much easier to work with relatively
stable US Dollar management and financial reports than financial reports in
Iranian rial when the rial is in hyperinflation, even when the rial management
and financial reports are done in terms of capital maintenance in units of
constant purchasing power in terms of a daily index (daily US Dollar parallel
rate) with the rial as the reporting currency.
A company may even never do any
business in actual US Dollars and still use accounting dollarization in order
to facilitate daily operatoins and financial reporting in terms of a relatively
stable unit of account as reporting currency during hyperinflation.
Accounting Standards Board
The IASB voted unanimously in May
2012 to submit the replacement of IAS 29
Financial Reporting in Hyperinflationary Economies to research. The
replacement process is not yet a full IFRS project.
In 6 to 8 years´ time a new IFRS
would require (not optional) capital
maintenance in units of constant purchasing power (what I am suggesting now for Iran) in terms of a
Daily CPI or other daily index at 10 percent annual inflation or 26 percent
cumulative inflation over three years, i.e., at the start of high inflation
instead of at the start of hyperinflation. The IASB encourages early adoption
of a proposed new standard.
The IASB defined hyperinflation in
1989 as cumulative inflation approaching or equal to 100 per cent over three
years, i.e., 26 percent annual inflation for three years in a row. This is the generally
accepted definition of hyperinflation since 1989 by millions of accountants and
all countries implementing IFRS worldwide. Cagan´s definition of hyperinflation
being 50 per cent monthly inflation is mainly followed by academics. It is not
the generally accepted definition of hyperinflation in the world economy since
1989. No country uses it nor could be required to use it for any purpose. Nor
would any country use Cagan´s definition especially as our understanding
increases regarding the difference between the cost of inflation/hyperinflation
and the cost of the stable measuring unit assumption mistakenly thought to be
the same as the cost of inflation/hyperinflation.
Although capital maintenance in
units of constant purchasing power was authorized (it passed the IASB´s due
process at that time) as an option
to HCA in 1989, its requirement
as stated above has to go through the IASB´s very extensive due process
procedure. This is done very thoroughly and takes time (several years). I
expect the IASB to authorise the new IFRS in 6 to 8 years´ time. It is only at
the reseach stage at the moment.
However, since capital maintenance
in units of constant purchasing power was authorized as an option in 1989 at all levels of inflation and
deflation – including during high inflation and hyperinflation - any entity in
the world, including all Iranian companies, can start implementing it
immediately. The new IFRS would give detailed guidance regarding the
implementation of capital maintenance in units of constant purchasing power in
terms of a Daily CPI or other daily index. The draft IFRS ´X’ CAPITAL
MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER is available here. I submitted it to
the IASB in January 2012. It is my comprehensive amendments to the Argentinean
Accounting Federation´s draft IFRS ´X´ INFLATION submitted to the IASB in 2010.
The Argentinean Federation´s draft IFRS was the combined effort (started in
2009) of the accounting authorities of Brazil, Mexico, Chile and Argentina. I
changed the core principle from inflation to capital maintenance in units of
constant purchasing power in terms of a daily index.
Inflation and hyperinflation have no
effect on the real value of non-monetary items. Inflation and hyperinflation
only erodes (destroys) the real value of money and other monetary items –
nothing else. The stable measuring unit assumption - as it forms part of
traditional Historical Cost Accounting - erodes (destroys) the real value of
constant items never maintained constant during inflation and hyperinflation,
e.g., the real value of that portion of a company´s capital (equity) not
maintained constant by the real value of its net assets.
Capital maintenance in units of
constant purchasing power, on the other hand, automatically maintains the real
value (constant purchasing power) of capital constant in all entities that at
least break even in real value – all else being equal – at all levels of
inflation and deflation, including during high inflation and hyperinflation,
whether these entities own any fixed assets or not.
If the new IFRS requiring capital
maintenance in units of constant purchasing power in terms of a Daily CPI or
other daily index were already authorized by the IASB and implemented in Iran
today, the Iranian constant item economy would today be stable during
hyperinflation – not the monetary economy (daily inflation-indexing the entire
money supply is required for that). It would be the same as what Brazil
implemented during those 30 years of very high and hyperinflation. Brazil had
positive economic growth during hyperinflation because they kept their constant
item economy stable with daily measurement in units of constant purchasing
power in terms of a government-supplied daily index.
I do not expect the replacement of
IAS 29 to require daily indexing of the entire money supply although I mentioned
it in the draft IFRS ‘X’ CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASINGPOWER. That is a monetary policy. I do not think the IASB has the authority to
require that. That has to be done by the monetary authority, normally the
solution the Iranian population is looking for
The above solution is what the
Iranian population is looking for right now for the whole economy. It is up to
the Iranian Accounting Authorities and the Central Bank of Iran to implement
Individual Iranian companies can
save themselves only from the erosive (destructive) effects of the stable
measring unit assumption of their constant items by spontaneously implementing
capital maintenence in units of constant purchasing power in terms of the daily
US Dollar parallel rate with either the rial or the US Dollar as reporting
currency while they wait for their Accounting Authority to require it on a
To avoid the erosion (destruction)
of the real value of their rials - while they wait for the Central Bank of Iran
to officially require daily inflation-indexing of the entire Iranian money
supply - they and Iranian individuals have to limit their holding of rials over
time (inflation and hyperinflation only happen over time) to the absolute minimum.
The perfect solution is to hold no rials from the one day to the next. Allways
invest in (buy) non-monetary items that maintain their real values during
hyperinflation on a daily basis with spare cash. That is what I did during
Angola´s hyperinflation in the company where I was responsible for financial
reporting from 1994 to 1997 and where I developed (during 1995) and implemented
accounting dollarization which I implemented in Auto-Sueco (Angola) – the Volvo
agents in that country - as from 1 January 1996. I then studied the principles
of capital maintenance in units of constant purchasing power in terms of a
daily index or rate over the next 16 years.
To stabilize and grow the entire
Iranian economy during hyperinflation (like what Brazil did for 30 years from
1964 to 1994) for the Iranian population an innovative combined effort is
required from the Central Bank of Iran and the Iranian Accounting Authorities.
The accounting solution (authorized as an option 23 years ago) will be required
by the IASB in 6 to 8 years´ time from all countries that implement IFRS with
annual inflation equal to or higher than 10 per cent per annum or cumulative
inflation equal to or higher than 26 percent over three years.